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You may have noticed that $$$MR. MARKET$$$ is slightly larger than most humans. Of course this is mostly because he spends countless hours in the gym training to be as HUGE as possible. However, diet is another component of this - and it’s not often that $$$MR. MARKET$$$ passes up the opportunity to have chips with his lunch. Be it Lays, Ruffles, Utz, or Wise - $$$MR. MARKET$$$ loves the salty snack that accompanies his meats and cheeses. Now this crisp delicacy does not always retain its consistency. When $$$MR. MARKET$$$ was a wee lad, he used to spend summers in humid Pocasset, MA. When you opened up a bag of potato chips in Pocasset in the summer, you usually had about 15 minutes to enjoy them, before the humidity began to take over. An open bag of chips left overnight in a cabinet would transform itself into something completely distasteful – soggy potato chips.
The micro chip industry is not very different from the potato chip. If technology passes it by, today’s microchip would soon transform into a useless piece of obsolescence – the equivalent of soggy potato chips. So finding a company that is on the forefront of semiconductor chip manufacturing is the equivalent of an unopened bag of potato chips to enjoy,
Yesterday I bought stock in Applied Materials (AMAT) at 31.27. I will sell it in 4 to 6 weeks at 36.01. Here’s why I love AMAT:
First of all, you have to love the chart. AMAT’s stock is up 58% in the last 52 weeks, yet its PE is still only at 20. That’s a really amazingly super cheap valuation, considering the smoking hot tech industry.
Applied Materials is a worldwide leader in the manufacture of capital equipment within the semiconductor industry, operating in
Europe, the Middle East, Asia and the U.S. That fact that AMAT is so HUGE and has a wide array of products feeding different services help insulate it from downturns in the economic cycle, and its high quality products protect its market share. As the leading global supplier of semiconductor equipment, Applied Materials will continue to benefit from the increasing demand for semiconductor equipment.
Applied Materials’ customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal and other displays, solar PV cells and modules, and other electronic devices. AMAT sells semiconductor fabrication tools to chip makers and offers tools for 11 of the 13 most significant steps of chip manufacturing. AMAT has a larger portfolio of semiconductor fabrication tools than any other company and competes mostly against smaller companies that specialize in specific areas of the fabrication process.
AMAT is easily the largest maker of equipment used in the production of semiconductors. It has engineers in nearly every fab in the world and its equipment is used in almost every sector of the semiconductor industry. Not only does AMAT benefit from a greater demand in semiconductor chips, it also benefits from increased complexity in chip design. Chips are getting smaller and smaller, while their design is getting more complex. This helps AMAT in two ways. First, smaller size means that chips can now be used in a variety of new ways, creating higher chip demand. Secondly, this increasingly complex chip design requires the addition of new steps to the manufacturing process, which means that AMAT can provide new or additional tools and equipment to complete those steps.
As chips become more complex the steps in the manufacturing process increase and the technology to complete those steps change. This provides AMAT with more business by offering products for the additional steps. AMAT is essentially the only company that can offer a product for nearly every step of the chip manufacturing process.
There are a few macro drivers that make you love the outlook for AMAT. Large, multi-year inflections are creating stronger demand in semiconductor and display: the evolution of 3D NAND; transition to 10/7nm nodes; everyone wants 3D materials-enabled patterning and accelerated adoption of OLED displays. These technology inflections are sparked by materials innovation, which plays directly to Applied’s strengths and expands its available market. Multiple longer term technology drivers, including augmented/virtual reality and smart vehicles, will fuel the need for higher performance computing, better networks and more and new types of memory. This will create demand for more and newer chips chips chips. These emerging drivers are expected to create new opportunities for Applied’s leading materials engineering technologies and products, and increase WFE and display industry investment in coming years.
Do not overlook selfdriving vehicles which are here and are going to be here in a big way before you know it. In less than 10 years, AMAT also sees smart vehicles spending $5K-$10K of semi content/car, up from $350-$1K of semi content now. That could be worth another 10 billion of annual revenue for AMAT. AMAT will take market share through its investments in R&D which should generate improved product quality combined with a company focus on supplemental service driving market share gains for AMAT.
The Display segment has been AMAT’s fastest growing segment over the last three years, growing at an average rate of 18% from the end of 2012 to the end of 2015. Consumer demand for increasingly larger and more advanced TVs and high resolution displays for next generation mobile devices drive growth in this segment. AMAT predicts the OLED serviceable addressable market is 3x as big as the liquid crystal display (LCD) serviceable addressable market. The iPhone 7S, due to come out in 2017, will have OLED Display technology12.
The emergence of categories like health monitoring devices and home automation gadgets, and the increased automation on factory floors, automobiles and elsewhere have added a new dimension to the industry. Environmental concerns and the need for judicious use of resources have also opened up opportunities in the form of chips reducing power consumption, reducing heat dissipation, capturing solar energy, creating more efficient lighting solutions and so forth. We can go on and on and on and on!
In April 2015, Applied Materials promptly announced a new $3 billion share repurchase authorization, which was completed in 2016. Then in June 2016, the company announced a new $2 billion repurchase authorization. Everyone knows that share repurchases are good for stock prices. First of all, the company insiders believe that their company is undervalued – that’s why they buy back their stock. Second, the fewer shares available mean that the company earnings are spread over a smaller denominator which forces earnings per share to be higher. It’s a virtual machine that drives up the stock price!
To give you an idea of how HUGE this Goliath is, Applied Materials’ revenue rose to $9.7 billion in 2015, and is expected to reach a range of $11 billion to $12 billion in 2017. Despite this size, EPS growth is expected to be around 25%. That’s really amazing when you consider how big this company is. With this kind of growth, the stock must be expensive, right? Wrong! AMAT sports a very modest forward PE ratio of 12.4. What’s even more interesting is that AMAT is cheap when compared to itself. Over the last several years, AMAT’s PE ratio has trended between 13 and 23 – which means that it is now due for some PE expansion, to further drive up its stock price. Even more flavorful is the fact that this stock pays a dividend of 1.3%. This stock hits on all cylinders. It’s a large-cap aggressive growth stock, but it’s also a ridiculously undervalued stock with a nice dividend yield and a wicked strong balance sheet.
Why am I so excited? Look at the most recent earnings report from a couple of weeks ago:
• Record annual EPS of $1.54, up 38 percent year over year and this earnings growth was across the board in its 3 biggest divisions:
• Semiconductor Systems segment achieves highest quarterly and annual revenue in 15 years. This is the largest and most important segment for AMAT. This segment is responsible for making the various tools and equipment used in the different steps of the semiconductor manufacturing process. The Silicon segment is the bread and butter of the company
• Applied Global Services generates record quarterly and annual orders and revenue. Applied Global Services (27.9% of total revenues): This segment produces spares, provides services, and replaces old equipment models for its customers
• Display and Adjacent Markets delivers record quarterly and annual revenue. Display (10.0% of total revenues): This segment sells products for manufacturing LCDs for TVs, personal computers, and other video-enabled devices.
· Fourth quarter new orders were $3.03 billion, up 25 percent year over year. Backlog of $4.58 billion was up 46 percent year over year.
· Net sales of $3.30 billion were up 39 percent year over year.
· The company recorded fourth quarter gross margin of 42.4 percent, operating margin of 23.6 percent, and diluted earnings per share (EPS) of $0.56.
· In fiscal 2016, new orders grew 23 percent to $12.42 billion and net sales increased 12 percent to $10.83 billion.
A quick survey of 22 ANAL-ysts covering AMAT reveals that 16 are rating the stock a buy while 5 rate AMAT a strong buy. There are 2 equity research firms advocating a Hold and 0 consider it Sell.
Why do ANAL-ysts like this stock so much?
· Forward PE of 12.4
· PEG ratio of 0.81
· Return on Assets 9%
· Return in Equity 23%
· Dividend yield of 1.3%
The ANAL-ysts are earnings per share of $2.39. I think with the buybacks and pending exciting frontiers for chip applications, we’re more likely to see EPS of $2.86. If you take this $2.86 and multiply it by the trailing PE of 20.4, you end up with a stock price of $58.34….which is well past my sell target.
The executive management loves AMAT also. Listen to what they said:
“In fiscal 2016, we grew orders, revenue, and earnings to the highest levels in the company’s history, and made significant progress towards our longer-term strategic and financial goals,” said Gary Dickerson, President and CEO. “We’ve focused our organization and investments to deliver highly differentiated solutions that enable customers to build new devices and structures that were never possible before.”
“As we look to 2017 and beyond, we see sustainable growth as new demand drivers layer on top of our traditional end markets in computing, mobility and consumer electronics,” said Bob Halliday, Senior Vice President and CFO. “The industries we serve are bigger and more attractive, our opportunity set is larger, our customer relationships are stronger, and we’re excited about our new product pipeline.”
CFO Robert Halliday said the company is “raising the ceiling on our financial model based on our confidence that we have the right capability, strategy and operating model to deliver sustainable growth in the near and long term.”
There’s not a lot more to be said other than $$$MR. MARKET$$$ went HUGE on this stock because he loves it and with all the bank I make on it, I’ll be snacking away on crunchy chips for a long time to come!
I am HUGE!
$$$MR. MARKET$$$
The micro chip industry is not very different from the potato chip. If technology passes it by, today’s microchip would soon transform into a useless piece of obsolescence – the equivalent of soggy potato chips. So finding a company that is on the forefront of semiconductor chip manufacturing is the equivalent of an unopened bag of potato chips to enjoy,
Yesterday I bought stock in Applied Materials (AMAT) at 31.27. I will sell it in 4 to 6 weeks at 36.01. Here’s why I love AMAT:
First of all, you have to love the chart. AMAT’s stock is up 58% in the last 52 weeks, yet its PE is still only at 20. That’s a really amazingly super cheap valuation, considering the smoking hot tech industry.
Applied Materials is a worldwide leader in the manufacture of capital equipment within the semiconductor industry, operating in
Europe, the Middle East, Asia and the U.S. That fact that AMAT is so HUGE and has a wide array of products feeding different services help insulate it from downturns in the economic cycle, and its high quality products protect its market share. As the leading global supplier of semiconductor equipment, Applied Materials will continue to benefit from the increasing demand for semiconductor equipment.
Applied Materials’ customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal and other displays, solar PV cells and modules, and other electronic devices. AMAT sells semiconductor fabrication tools to chip makers and offers tools for 11 of the 13 most significant steps of chip manufacturing. AMAT has a larger portfolio of semiconductor fabrication tools than any other company and competes mostly against smaller companies that specialize in specific areas of the fabrication process.
AMAT is easily the largest maker of equipment used in the production of semiconductors. It has engineers in nearly every fab in the world and its equipment is used in almost every sector of the semiconductor industry. Not only does AMAT benefit from a greater demand in semiconductor chips, it also benefits from increased complexity in chip design. Chips are getting smaller and smaller, while their design is getting more complex. This helps AMAT in two ways. First, smaller size means that chips can now be used in a variety of new ways, creating higher chip demand. Secondly, this increasingly complex chip design requires the addition of new steps to the manufacturing process, which means that AMAT can provide new or additional tools and equipment to complete those steps.
As chips become more complex the steps in the manufacturing process increase and the technology to complete those steps change. This provides AMAT with more business by offering products for the additional steps. AMAT is essentially the only company that can offer a product for nearly every step of the chip manufacturing process.
There are a few macro drivers that make you love the outlook for AMAT. Large, multi-year inflections are creating stronger demand in semiconductor and display: the evolution of 3D NAND; transition to 10/7nm nodes; everyone wants 3D materials-enabled patterning and accelerated adoption of OLED displays. These technology inflections are sparked by materials innovation, which plays directly to Applied’s strengths and expands its available market. Multiple longer term technology drivers, including augmented/virtual reality and smart vehicles, will fuel the need for higher performance computing, better networks and more and new types of memory. This will create demand for more and newer chips chips chips. These emerging drivers are expected to create new opportunities for Applied’s leading materials engineering technologies and products, and increase WFE and display industry investment in coming years.
Do not overlook selfdriving vehicles which are here and are going to be here in a big way before you know it. In less than 10 years, AMAT also sees smart vehicles spending $5K-$10K of semi content/car, up from $350-$1K of semi content now. That could be worth another 10 billion of annual revenue for AMAT. AMAT will take market share through its investments in R&D which should generate improved product quality combined with a company focus on supplemental service driving market share gains for AMAT.
The Display segment has been AMAT’s fastest growing segment over the last three years, growing at an average rate of 18% from the end of 2012 to the end of 2015. Consumer demand for increasingly larger and more advanced TVs and high resolution displays for next generation mobile devices drive growth in this segment. AMAT predicts the OLED serviceable addressable market is 3x as big as the liquid crystal display (LCD) serviceable addressable market. The iPhone 7S, due to come out in 2017, will have OLED Display technology12.
The emergence of categories like health monitoring devices and home automation gadgets, and the increased automation on factory floors, automobiles and elsewhere have added a new dimension to the industry. Environmental concerns and the need for judicious use of resources have also opened up opportunities in the form of chips reducing power consumption, reducing heat dissipation, capturing solar energy, creating more efficient lighting solutions and so forth. We can go on and on and on and on!
In April 2015, Applied Materials promptly announced a new $3 billion share repurchase authorization, which was completed in 2016. Then in June 2016, the company announced a new $2 billion repurchase authorization. Everyone knows that share repurchases are good for stock prices. First of all, the company insiders believe that their company is undervalued – that’s why they buy back their stock. Second, the fewer shares available mean that the company earnings are spread over a smaller denominator which forces earnings per share to be higher. It’s a virtual machine that drives up the stock price!
To give you an idea of how HUGE this Goliath is, Applied Materials’ revenue rose to $9.7 billion in 2015, and is expected to reach a range of $11 billion to $12 billion in 2017. Despite this size, EPS growth is expected to be around 25%. That’s really amazing when you consider how big this company is. With this kind of growth, the stock must be expensive, right? Wrong! AMAT sports a very modest forward PE ratio of 12.4. What’s even more interesting is that AMAT is cheap when compared to itself. Over the last several years, AMAT’s PE ratio has trended between 13 and 23 – which means that it is now due for some PE expansion, to further drive up its stock price. Even more flavorful is the fact that this stock pays a dividend of 1.3%. This stock hits on all cylinders. It’s a large-cap aggressive growth stock, but it’s also a ridiculously undervalued stock with a nice dividend yield and a wicked strong balance sheet.
Why am I so excited? Look at the most recent earnings report from a couple of weeks ago:
• Record annual EPS of $1.54, up 38 percent year over year and this earnings growth was across the board in its 3 biggest divisions:
• Semiconductor Systems segment achieves highest quarterly and annual revenue in 15 years. This is the largest and most important segment for AMAT. This segment is responsible for making the various tools and equipment used in the different steps of the semiconductor manufacturing process. The Silicon segment is the bread and butter of the company
• Applied Global Services generates record quarterly and annual orders and revenue. Applied Global Services (27.9% of total revenues): This segment produces spares, provides services, and replaces old equipment models for its customers
• Display and Adjacent Markets delivers record quarterly and annual revenue. Display (10.0% of total revenues): This segment sells products for manufacturing LCDs for TVs, personal computers, and other video-enabled devices.
· Fourth quarter new orders were $3.03 billion, up 25 percent year over year. Backlog of $4.58 billion was up 46 percent year over year.
· Net sales of $3.30 billion were up 39 percent year over year.
· The company recorded fourth quarter gross margin of 42.4 percent, operating margin of 23.6 percent, and diluted earnings per share (EPS) of $0.56.
· In fiscal 2016, new orders grew 23 percent to $12.42 billion and net sales increased 12 percent to $10.83 billion.
A quick survey of 22 ANAL-ysts covering AMAT reveals that 16 are rating the stock a buy while 5 rate AMAT a strong buy. There are 2 equity research firms advocating a Hold and 0 consider it Sell.
Why do ANAL-ysts like this stock so much?
· Forward PE of 12.4
· PEG ratio of 0.81
· Return on Assets 9%
· Return in Equity 23%
· Dividend yield of 1.3%
The ANAL-ysts are earnings per share of $2.39. I think with the buybacks and pending exciting frontiers for chip applications, we’re more likely to see EPS of $2.86. If you take this $2.86 and multiply it by the trailing PE of 20.4, you end up with a stock price of $58.34….which is well past my sell target.
The executive management loves AMAT also. Listen to what they said:
“In fiscal 2016, we grew orders, revenue, and earnings to the highest levels in the company’s history, and made significant progress towards our longer-term strategic and financial goals,” said Gary Dickerson, President and CEO. “We’ve focused our organization and investments to deliver highly differentiated solutions that enable customers to build new devices and structures that were never possible before.”
“As we look to 2017 and beyond, we see sustainable growth as new demand drivers layer on top of our traditional end markets in computing, mobility and consumer electronics,” said Bob Halliday, Senior Vice President and CFO. “The industries we serve are bigger and more attractive, our opportunity set is larger, our customer relationships are stronger, and we’re excited about our new product pipeline.”
CFO Robert Halliday said the company is “raising the ceiling on our financial model based on our confidence that we have the right capability, strategy and operating model to deliver sustainable growth in the near and long term.”
There’s not a lot more to be said other than $$$MR. MARKET$$$ went HUGE on this stock because he loves it and with all the bank I make on it, I’ll be snacking away on crunchy chips for a long time to come!
I am HUGE!
$$$MR. MARKET$$$
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